4. I theorem of welfare economics – all market equilibriums are Pareto efficient.

5. II theorem of welfare economics – if all the agents have convex preferences, than there will always be a set of prices, that each Pareto efficient allocation is a market equilibrium for an appropriate assignment or endowment.

6. Pareto efficiency takes place only under certain conditions:

   1. Perfect competition.

   2. No externalities.

   3. Hicks – Coldu (?????) criteria of efficiency. It says that an economic project is efficient if all the possible gains can compensate all the possible losses. And still they remain net gain.

7. P rinciple possibility of losses compensation.Icks

Social Influence Curve (SIC) slope = MSBx / MSBy

Production Possibility Curve (PPC) slope = MSCx / MSCy

3. Market failures (MF) and government policy. MF – things that market can’t do. They are:

   1. External effects / externalities.

   2. Market doesn’t allocate resources efficiently.

   3. Public goods are not produced by the market.

   4. Market power or monopolistic trends. The market has no instruments against it.

   5. Incomplete/asymmetric information.

   6. Inflation.

   7. Unemployment.

   8. Problem of poverty.

   9. Time lags.

   10. Dependence. Market regulates the activity of labour people. But there are also children, pensioners. Market doesn’t spread its mechanisms on them.

4. Externalities. Third party effect. Side effect. Bystander effect. It means that the costs and benefits are borne by a third party.

   1. There are positive and negative external effects, divided into 4 groups:

      1. External costs of production.

      2. External costs of consumption.

      3. External benefits of production.

      4. External benefits of consumption.

   2. Costs are negative. Benefits are positive.

   3. When production or consumption results in external costs there is always overproduction or over consumption in comparison with sociable desirable level. Resources are over allocated to such production or consumption. And visa versa – when there are some positive effects. We have underprod or undercons and resources are under allocated.

   4. EX: Pollutions. Marginal social costs are bigger then private MC. External cost of consumption. Result in alcohol consumption, society takes cost. EX of a positive effect – education. MSB>MPB.

   5. External effects can be regulated by the government. Method: Internalize the external cost:

      1. Taxes (Pigourian taxes)

a b – external costs per unit of Q.

ab – tax per unit.

Production can be reduced. Gov can introduce a tax=ext cost. In the case of ext benefit, Gov can use subsidies to encourage the production and/or consumption.

2. Legislation and administrative control – measure to regulate externals.

3. Coase theorem. External effects influence the transaction costs.

   1. When the № of people who are involved in the conflict (???) is not big.

   2. When the property rights are defined clearly and the cost of negotiation are small, Gov should not interfere. Conflict can be regulated by negotiation.

4. Sell the right to pollute for example.

1. Public goods –

   1. the goods produced not by the market at all,

   2. have great extensional benefits

   3. are socially desirable

   4. indivisible (can’t be divided into units)

   5. There is no rivalry in consumption.

   6. They are not excludable (it is not possible to exclude someone from their consumption, no matter whether he paid or not).

   7. They are financed from taxes.

P	Qa	Qb	Qd	P (how much will people pay for the good)
5	0	1	1	5+4=9
4	1	2	2	4+3=7
3	2	3	3	3+2=5
2	3	4	4	2+1=3
1	4	5	5	1

In the case of publ goods we sum up vertically.

For private – horizontally. To get AD curve.

To chose what to produce people vote, but it doesn’t provide the best choice.

Deriving preferences through majority voting:

Public good	Preferences
	A	B	C
National defense	1 – 1-st choice	3	2
Roads	2	1	3
Heat/Warming	3	2	1

• Nat defense versus road  Nat defense

• Road VS Heating  Road.

• Nat Defense VS Heating Heating